Identifying opportunities in a changed market landscape
Navigating Asian and global markets amid a post-crisis era of economic recovery – marked by volatile trading, new regulations and wide-reaching government fiscal policies – has created both challenges and opportunities for fund managers, said speakers at the recent Lyxor Hedge Fund Forum* in Singapore.
Lyxor Asset Management operates one of the industry’s largest Hedge Fund managed account platforms, with $12 billion in AUM across more than 100 external managers running a diverse range of strategies worldwide.
Founded in 1998, Lyxor – a subsidiary of Societe Generale – provides its hedge fund managed account platform to institutional investors globally. The platform is part of Lyxor’s $21 billion alternative investment offerings, which include funds-of-funds and alternative indexing.
Presenters at the Lyxor Hedge Fund Forum comprised managers from platform constituents Nezu Asia Capital Management, Goldman Sachs Asset Management and also Cyrus Amaria, director of managed account development at Lyxor Asset Management.
Nezu co-founder and fund manager Fuyuki Fujiwara highlighted opportunities in the Japanese market, which has staged a remarkable turnaround as a result of domestic financial stimulus measures that were launched last year.
Fujiwara noted that with depreciation of the yen and a relaxation of monetary policy under Abenomics, “Japan is in pretty good shape."
Nezu took the view that the country is undergoing a “manufacturing renaissance”, led by a lower currency valuation against the dollar. “A key driver of the economy tends to be external demand,” noted Fujiwara, chiefly in the form of exports.
The yen’s depreciation provides Japanese exporters with a price advantage against those based in other markets. Yet some companies will benefit more than others, said Fujiwara.
Manufacturers that have a clear focus and target specific market segments stand to gain the most – a view that Nezu has applied to its stock-picking decisions.
Another growth area identified by Nezu, over a long-term horizon, is gas demand in Asia. The region will see an estimated 125% growth in liquefied natural gas (LNG) from 2010 to 2025, according to industry estimates.
“Asia already accounts for about 70% global of LNG demand today, but that’s primarily concentrated in developed markets such as Japan and Korea,” says Fujiwara. “Going forward, it will be emerging Asia that will be driving growth, from countries such as Indonesia, Malaysia and China.”
Nezu predicted that beneficiary companies would include Korean shipbuilders, Singapore rig yard operators, LNG support vessel makers, LNG engineering, procurement and construction companies, and oilfield service operators.
Mainland oilfield services providers may also provide opportunities. “China clearly needs to produce more energy itself and it prefers to produce its energy onshore or within its own borders,” said Fujiwara.
Globally, Nezu viewed the broader markets in general as being favourable for equity investing, particularly during periods of lower volatility.
“Central banks are helping to ensure that equity markets are becoming less volatile [and] less susceptible to shock,” says Fujiwara, adding that the next two-to-three years are expected to be good for stock pickers.
Presenting a macro view, Jonathan Xiong, senior portfolio manager of Goldman Sachs Asset Management, noted that there is “a global recovery, but at very idiosyncratic paces”.
“In our approach, we see the world in three different types of risks: directional risk, relative value risk and idiosyncratic risk,” says Xiong.
GSAM has observed significant post-crisis changes in global fixed income and currency markets, which have created investment opportunities.
Increased central bank intervention in fixed income and currency markets may reduce their efficiency, providing potential opportunities for arbitrage and relative value strategies.
In the near term, a tapering of post-crisis bond purchases is expected not only in the US, but also in the UK, says Xiong. Meanwhile, Japan appears to be continuing on a course of monetary easing, as does the European Central Bank.
“You have the US and UK about to raise [interest] rates, Europe and Australia dropping rates, and also Canada possibly dropping rates,” says Xiong. At the same time, in emerging economies, Mexico and Israel are cutting interest rates, while those of Brazil, Indonesia and India are set to rise.
“This is a huge divergence in global monetary policy, so we think relative value across the G10 long/short rate space is one of the bigger opportunities, along with FX,” said Xiong.
Meanwhile, on the regulatory front, Cyrus Amaria of Lyxor discussed the importance of the Alternative Investment Fund Managers Directive in providing institutional investors with regulated access to hedge funds.
Amaria is a Director on Lyxor’s Managed Account Development team, and oversees the strategic development of Lyxor’s managed account capabilities and alternative investment offerings to investors.
“The directive focuses on risk management,” said Amaria. “[Regulators] want to see clear processes. They want to see risk management separate from portfolio management, a liquidity management process and processes for counterparty risk and operational risk. In terms of disclosure, you need to disclose your leverage levels and the securities you’re utilising.
“We think the AIFMD model in Europe will have very good chance in being successful globally,” as institutions will increasingly seek out regulated managers, said Amaria.
“It doesn't remove all the risks,” he added, “but it should make it, all things being equal, a better structure.”
The AIFM framework complements managed-account platforms, said Amaria, by helping to reduce inherent risks.
Liquidity is strictly monitored, as is risk management, as these are additional checks provided by the external platform provider. Fraud risk is also addressed through the structure of the platform, which provides full segregation of assets and independent governance.
From the perspective of hedge fund managers, “the biggest risk you have is the cost”, in terms of coming into compliance with the directive’s requirements, said Amaria.
The investor perspective is that “AIFMD is extremely important”, he said, particularly those of an institutional nature. “Nearly everything in the directive is going down the [road of] institutionalisation of the hedge fund industry.”
The future direction of the hedge fund industry, and also current investment trends, were among the topics of a panel discussion by Amaria, Xiong and Fujiwara, along with Garry Hawker, director of consulting, growth markets at Mercer.
Hawker posited that the much-cited ‘great rotation’ of allocations out of bonds into stocks is a myth.
“We still have clients who are allocating to fixed income simply because they’re de-risking their portfolios,” said Hawker. “Particularly among pension funds in developed economies which are mature and more focused on their ability to meet their liabilities in the future, rather than taking on a lot of risk on the company balance sheet. Those types of investors are still loading up on fixed income allocations.”
Hawker added: “The change is where the fixed income is being invested. Some are rotating out of developed markets into emerging market debt. Also, in terms of credit, we’re seeing allocations to high-yield instruments go up. Clients are not getting out of fixed income, but they’re investing in fixed income in a different way.”
Another anticipated event is the tapering of US Federal Reserve bond purchases. “We have a view that tapering expectations may happen sooner rather than later,” says Xiong, who noted that a commencement of tapering in May would likely lead to volatility within Q1, 2014.
Even when potential volatility is factored in, GSAM predicted that there will be room for economic growth this year, “concentrated in the UK, US and certain Latin American countries that benefit from proximity to North America,” said Xiong.
“We’re a little bit less bullish on Southeast Asia recently, given our not-so-bullish outlook on China,” he added.
Nezu, meanwhile, expected tepid global growth in 1H, 2014, which will lead to a continuation of low interest rates. “It will be relatively stagnant in the first half,” says Fujiwara. “We’ll see what happens after that.”
* See AsianInvestor's forthcoming February 2014 edition for a report on the recent Lyxor Hedge Fund Forum in Singapore.